At the end of the year, a company offered to buy 4,450 units of a product...

At the end of the year, a company offered to buy 4,450 units of a product from X Company for a special price of $11.00 each instead of the company's regular price of $17.00 each. The following information relates to the 62,400 units of the product that X Company made and sold to its regular customers during the year:

	Per-Unit	Total
Cost of goods sold	$7.80	$486,720
Period costs	2.74	170,976
Total	$10.54	$657,696

Fixed cost of goods sold for the year were $142,272, and fixed period costs were $83,616. Variable period costs include selling commissions equal to 3% of revenue.

6. Profit on the special order is

7. Assume the following two changes for the special order: 1) variable cost of goods sold will decrease by $0.78 per unit, and 2) there will be no selling commissions. What would be the effect of these two changes on the special order profit?

8. There is concern that regular customers will find out about the special order, and X Company's regular sales will fall by 950 units. As a result of these lost sales, X Company's profits would fall by

Expert Solution

6). Assuming there is excess capacity available for the company due to which there will be no extra burden of fixed costs because fixed costs is already charged on regular orders.

Variable cost = Total cost - Fixed cost
Variable cost of goods sold = $486,720 - $142,272 = $344,448
Variable COGS per unit = $344,448 / 62400 units = $5.52 per unit

Variable period cost = $ 170,976 - $83,616 = $87,360
Variable period cost per unit = $87,360 / 62400 units = $1.4 per unit

Calculation of profit of special order:-
Selling Price = $11 per unit
Less: Var. COGS = $5.52 per unit
Less: Var. period cost = $1.4 per unit
Profit per unit = $4.08 per unit

Total profit for 4450 units = $4.08 * 4450 = $18,156

7). Variable COGS for special order = $5.52 - $0.78 = $4.74 per unit
Variable period cost for special order = $1.4 - ($17 * 3%) = $1.4 - $0.51 = $0.89 per unit

Calculation of profit of special order:-
Selling Price = $11 per unit
Less: Var. COGS = $4.74 per unit
Less: Var. period cost = $0.89 per unit
Profit per unit = $5.37 per unit

Total profit for 4450 units = $5.37 * 4,450 = $23,896.50
Change in profit due to above changes = $23,893.50 - $18,156= $5,740.50 (Increase in profit)

8). Loss of 950 units:
Profit fall due to loss of 950 units is = 950 * $4.08 = $3,876

ekkarill92 answered 3 months ago

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